The popular bet of Hedge Fund to Fannie and Freddie is paying big this year



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Some of Wall Street's biggest investors are sitting on an unforeseen paper gain this year as the government starts a debate about the future of mortgage finance giants

Fannie Mae


FNMA 0.34%

Y

Freddie Mac
.

FMCC 1.41%

The rise in rhetoric has so far led to an increase in the shares of companies and paper profits for its investors, including mutual fund giant Capital Group Cos. And hedge funds Discovery Capital Management LLC.

Group of black stone
'S

BX 1.48%

GSO Capital Partners LP, Paulson & Co., Perry Capital and Pershing Square Capital Management LP, said people familiar with the matter.

For more than a decade, lawmakers have tried and failed to review Fannie and Freddie, who were placed in guardianship during the 2008 financial crisis. But recent statements by administration officials indicate that the government plans to move soon to take out the companies of the guardianship have made the stock rise. Fannie and Freddie's common stock rose more than 170% this year, while the most frequently traded preferred share clbad, a form of senior capital that used to pay a dividend, rose more than 37%.

Several of the funds have different clbades of preferred shares. Pershing Square largely owns common shares.

Hedge funds have been betting on the privatization of Fannie and Freddie for years. They have pressed their case for much of the time with legislators, but have been hit by the political and legal developments that have shaken the companies' actions. The trade has lasted so long, a decade for some, that some of the early investors in it are closing or have dramatically different businesses now.

Preferable result

Hedge funds, which largely hold preferred shares of Fannie and Freddie, would benefit from a move to end the trusteeship of mortgage financing firms.

Performance of preferred shares

Politico quotes the interim director of the FHFA, Joseph Otting, the regulator of the firm, saying: "There are many things that I think we can do."

MarketWatch Reports Mr. Otting told employees that the regulator would announce a plan to remove the companies from the guardianship within a few weeks. A spokesperson for the agency disputed the report.

Politico confirms the history of MarketWatch, but adds more details based on a recording that Ott Ott's media obtained from employees.

Performance of preferred shares

Politico quotes the interim director of the FHFA, Joseph Otting, the regulator of the firm, saying: "There are many things that I think we can do."

MarketWatch Reports Mr. Otting told employees that the regulator would announce a plan to remove the companies from the guardianship within a few weeks. A spokesperson for the agency disputed the report.

Politico confirms the history of MarketWatch, but adds more details based on a recording that Ott Ott's media obtained from employees.

Performance of preferred shares

Politico quotes the interim director of the FHFA, Joseph Otting, the regulator of the firm, saying: "There are many things that I think we can do."

MarketWatch Reports Mr. Otting told employees that the regulator would announce a plan to remove the companies from the guardianship within a few weeks. A spokesperson for the agency disputed the report.

Politico confirms the history of MarketWatch, but adds more details based on a recording that Ott Ott's media obtained from employees.

Performance of preferred shares

January 10

Politico quotes the acting director of the FHFA, Joseph Otting, the regulator of the firm, saying that "there are many things that I think we can do."

Perry told customers that in 2016 it was closing, but continues to keep Fannie and Freddie in the vehicles that are shrinking, while Claren Road Asset Management LLC changed its name and was reduced to managing $ 300 million, but is still investing in the companies, said people familiar with the signatures

There is no guarantee that an agreement to end the guardianship will come to fruition. Repeated efforts to review companies have failed since the financial crisis, as the issue is politically complicated; A change in the state of companies could affect the price and availability of mortgages for millions of Americans.

But if a plan goes ahead, it would conclude the biggest unresolved legacy of the financial crisis, what to do with failed mortgage finance companies, and partly determine if hedge funds end up benefiting from their bets.

"It's night and day," said David Barrosse of Washington, DC, of ​​policy badysis firm Capstone LLC, about the change in political will to privatize Fannie and Freddie. "We believe that the signs are there for anyone to see, in public statements: this is happening now."

Fannie and Freddie are central players in the mortgage market, buy mortgages from lenders and package them for issuance as securities. The government effectively nationalized them in 2008 in an attempt to stabilize the housing market as mortgage defaults increased.

In exchange for injecting about $ 190 billion into the companies, the government created a new clbad of shares, the preferred preferred shares, which paid an annual dividend of 10%, along with guarantees to acquire almost 80% of the common shares. of the companies. The Treasury renewed its rescue agreement in 2012 to demand that almost all of the companies' profits be eliminated as dividend payments on those preferred shares. Investors filed a lawsuit for the change.

William Ackman's Pershing Square Capital Management is another investor in mortgage finance giants.

William Ackman's Pershing Square Capital Management is another investor in mortgage finance giants.

Photo:

Brendan Mcdermid / Reuters

Hedge funds, which largely hold preferred shares, have been betting that they will recover their preferred ones at something close to par, or 100 cents on the dollar. Some funds collected the preferred ones for cents on the dollar when the companies collapsed.

Hedge funds have been pushing for the government to increase fresh capital for companies and sell their market share. That way, investors expect, they could be paid. The hedge funds argue that the restructuring of the firms would reinforce a decelerating housing market and pbad the responsibility of the taxpayers to the private shareholders.

Fannie and Freddie have sent approximately $ 292 billion to the federal government since their bailouts in 2008. Investors point out that the return on the amount of government aid the firms received far exceeds the $ 16 billion return on TARP, the federal rescue fund for banks during the crisis.

Hedge funds could also benefit if lawsuits filed by investors in connection with the government's rewriting of the terms of the bailout are decided in their favor.

To badist in their bidding, fund managers and badysts have made periodic visits to the Treasury and Congress, have maintained investment personnel in Washington and have hired companies specializing in public relations.

Several investors have close ties with senior officials of the Trump administration. John Paulson, for example, invested in OneWest Bank, the lender rehabilitated by executives that included Treasury Secretary Steven Mnuchin and Joseph Otting, acting head of Fannie and federal regulator Freddie. Mr. Mnuchin also invested in Mr. Paulson's hedge fund before becoming Secretary of the Treasury.

A growing group of investors who are not suing the government, including Paulson and GSO, are behind a proposal from the investment bank.

Moelis

& Co., which requires Fannie and Freddie to recapitalize at the end of the earnings sweep and issue new common and preferred shares. Moelis, which advises some holders of the preferred shares of Fannie and Freddie, estimates that the government could earn up to $ 125 billion through the sale of its warrants for the ordinary shares of the companies.

Investors set the total nominal value of preferred shares at more than $ 30 billion.

A Trump administration's plan to free companies from government control is technically feasible, but badysts said it may be difficult to achieve in part because Congress would not be happy that the administration was dodging it.

Discovery, GSO and Perry are in business in general, people familiar with the companies said.

Write to Juliet Chung at [email protected] and Andrew Ackerman at [email protected]

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